Operational risk and regulatory capital – the story so far

In the year since FITAR first wrote on the topic, the prospect of a regulatory capital charge for the operational risks run by banks has quietly drawn closer. It has also become clearer that its relevance to those who prepare, audit and read accounts has grown. Now, with the comment period for proposals from both Basel (the Committee on Banking Supervision) and Brussels (the European Commission’s Markets Directorate General) nearly over, it is an appropriate time to review what is most likely to happen to the idea of such a charge.

Operational risk remains a loosely defined concept A survey conducted last year by Price-waterhouseCoopers on behalf of three trade associations – the British Bankers’ Association, the International Swaps and Derivatives Association and Robert Morris Associates – attracted considerable publicity, not least because it offered what appeared to be the first “consensus” definition of the risk: “The risk of direct or indirect loss arising from inadequate or failed processes, people and systems or from external events”. Even so, this does not really disguise the difficulty of precisely delineating operational risk in a way which makes sense from an accounting (or, presumably, a regulatory capital) point of view. The consultative paper issued on June 3 last year by the Basel Committee clearly kept its options open in terms of what it really meant by “operational risk”.